LAW REFORM COMM I S S I ON O F B R I T I S H C O L U M B

LAW REFORM COMMISSION

OF BRITISH COLUMBIA

FIXTURES AND THE

P ERSO NAL P RO PERT Y

SECURITY ACT

(INTERIM REPORT)

LRC 130 January, 1993

The Law Reform Commission of British Columbia was establishedby the Law Reform Commission Act in 1969 and began functioning in 1970.

The Commissioners are:

ARTHUR L. CLOSE, Q.C., ChairmanLYMAN R. ROBINSON, Q.C.PETER T. BURNS, Q.C.THOMAS G. ANDERSON

Gregory G. Blue and Elizabeth S. Liu are Legal Research Officers tothe Commission.

Sharon St. Michael is Secretary to the Commission.

Linda Grant provides text processing and technical copy preparation.

The Commission offices are located at Suite 601, Chancery Place,865 Hornby Street, Vancouver, B.C. V6Z 2G3.

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T h e Law R e f o rm Co m m is s io n g ra t e f u lly a c kn o w le d g e sth e f in a n c ia l s u p p o rt o f th e Law Fo u n d a t io n o f B rit is hCo lu m b ia in c a rry in g o u t th is p ro je c t .

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Canadian Cataloguing in Publication DataLaw Reform Commission of British Columbia.

Fixtures and the Personal Property Security Act(interim report)

(LRC, ISSN 0843-6053 ; 130)

Includes bibliographical references: p.ISBN 0-7718-9345-0

1. Security (Law) - British Columbia. 2. Personal property -British Columbia. 3. British Columbia. Personal Property SecurityAct. I. Title. II. Series: Law Reform Commission of BritishColumbia. LRC ; 130.

KEB271.A72L38 1993 346.711'074 C93-092066-XKF1050.L38 1993

TO THE HONOURABLE COLIN GABELMANN

ATTORNEY GENERAL OF THE PROVINCE OF BRITISH COLUMBIA:

The Law Reform Commission of British Columbia has thehonour to present the following:

REPORT ON

FIXTURES AND THEPERSO NAL PRO PERTY SECURITY ACT

This is an Interim Report which brings forward recom-mendations on a particular portion of a larger project referred to theLaw Reform Commission early in 1992. The reference was broadlydirected at the interface between the Personal Property Security Act and realproperty law, but it also identified the treatment of fixtures under thePersonal Property Security Act as a matter which called for particularattention. This aspect of the reference has been given priority.

Apart from two issues which the Commission has identifiedas requiring further study, the conclusion in this Report is that thegeneral approach to fixtures taken by the Personal Property Security Act issatisfactory and the focus of any law reform measures should be toclarify the operation of the Act where that appears to be necessary.Recommendations are made accordingly.

Arthur L. Close, Q.C.January 14, 1993 Chairman

Table of Contents

I BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1A. Fixtures Generally. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1B. Concerns in Relation to Fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . . 3C. This Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

II REFORM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6A. Definition Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

1. The Problem. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62. Finding a Solution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

(a) Scope of the Problem. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8(b) Wider use of the “personal property,

fixtures and crops” Formulation. . . . . . . . . . . . . . . . . . . 10(c) Redraft to Eliminate References to

“personal property”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(d) Define “personal property” for the

Purposes of Particular Sections. . . . . . . . . . . . . . . . . . . . 113. Crops and Other Interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . 124. Recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

B. Section 36(3): “person with an interest in the land”. . . . . . . . . . 14C. Fraud and Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15D. Conclusion and Summary of Recommendations. . . . . . . . . . . . . 19E. Acknowledgements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

APPENDIX A: PERSONAL PROPERTY SECURITY ACT. . . . . . . . 25

APPENDIX B: TERMS OF REFERENCE. . . . . . . . . . . . . . . . . . . . . . 42

APPENDIX C: THE OPERATION OF SECTION 36. . . . . . . . . . . . . 43A. Background to Section 36. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43B. The Policies of Section 36. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43C. The Functioning of Section 36. . . . . . . . . . . . . . . . . . . . . . . . . . . 44D. Other Limits on Fixture Financing. . . . . . . . . . . . . . . . . . . . . . . . 46

APPENDIX D: WHAT IS A FIXTURE?. . . . . . . . . . . . . . . . . . . . . . . . 48A. At Common Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48B. Under the PPSA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

APPENDIX E: TWO OUTSTANDING ISSUES. . . . . . . . . . . . . . . . . 52A. Priority to Fixtures Under a General

Security Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52B. Narrowing the Concept of “fixture”. . . . . . . . . . . . . . . . . . . . . . . 53

1. S.B.C. 1989, c. 36. Selected provisions of the A ct are set out in Appendix A to this Report.

2. R .S.B.C. 1979, c. 219.

3. The full terms of reference are set out as Appendix B to this Report.

4. Ibid . para. 4.

5. R .S.B.C. 1979, c. 370.

6 . “Affixation” is a term usually employed to describe the connection or attachment of the item to the land.

1

CHAPTER I BACKGROUND

A. Fixtures Generally

Early in 1992 the Attorney General requested the LawReform Commission to examine the “relationship between thePersonal Property Security Act and the Land Title Act in their application to1 2

property that may have characteristics both of land and of personalproperty.” An example of property which displays both characteris-3

tics is the “fixture” and the terms of reference for this study re-quested that particular attention be given to certain issues that arisein relation to fixtures.4

A simple example illustrates the basic idea of the fixture andsome of the issues it raises. A newly manufactured item of tangibleproperty, such as a furnace, is indisputably personal property. Whenit is sold by the manufacturer to a furnace dealer, the transaction isgoverned by the Sale of Goods Act. It has none of the characteristics of5

land.

Later, however, the furnace will be installed in a building. Atthe time the furnace becomes “affixed” its legal character changes.6

In law the furnace loses it identity as an item of personal property.It becomes part of the “land” to which it is attached. Still later, thefurnace may become worn out and require replacement. When it isdetached from the land for sale to a scrap dealer it may again assumethe character of personal property.

These rules operate simply and fairly so long as there are nocompeting interests in either the land or the furnace which must beaccommodated. But matters are not always that simple. The ownermay mortgage the land to a lender. This may occur either before orafter the furnace is installed. The owner may also create a separatesecurity interest in the furnace in favour of a second lender. Again,this might occur either before or after the furnace is installed. Howis a competition over the furnace between these two secured lendersto be resolved?

CHAPTER I: BACKGROUND

7. S. 49.

2

The “classic” rules of real property mandate an answer whichinvariably favours the lender who took the mortgage on the land.Once the furnace becomes part of the land, any existing security init vanished and no new security interest in the furnace alone could becreated.

The classic position has obvious drawbacks. The owner ofthe land cannot use the fixtures as collateral in a separate financingtransaction - even if that transaction is the one that allows the landowner to acquire the fixture in the first place. It may also deprive theowner of a valuable source of collateral that would support anextension of credit for other purposes. This suggests the need for ascheme which modifies the classic position in a way which permitsthe land owner to use fixtures as a separate asset base for the purposeof obtaining financing.

An innovation of this kind would result in a legal positionwhere particular items of property are treated as land, in somecircumstances and for some purposes, and as personal property inother circumstances and for other purposes. “Land” and “personalproperty” are both legal concepts which carry their own body ofrules. These rules may collide when interests come into competition.This raises the need for a set of meta-rules to define the result whenthere is a clash between the systems of primary rules. A properlyfunctioning set of meta-rules would permit fixture-based financingwhile, at the same time, recognize the legitimate expectations ofpersons whose interests in fixtures are based on an interest in theland itself. Section 36 of the Personal Property Security Act (PPSA)purports to provide such a set of meta-rules.

Briefly stated, section 36 modifies the common law rule thatgoods which become attached to land become part of that land. Thisallows a security interest in the goods to exist independently of aninterest in the land. The PPSA provides machinery which permitsthe holder of such a security interest to register a notice of it on thetitle to the land. The fact and timing of that registration may affect7

the secured party's priority in any competition with a person whoseinterest in the goods is based on an interest in the land itself. Thefull text of section 36 is set out in Appendix A to this Report and amore detailed explanation of its operation and the priority rules itestablishes is to be found in Appendix C.

B. Concerns in Relation to Fixtures


8. This does not appear to be the experience of other Canadian PPSA jurisdictions where the fixture

provisions have not given rise to sim ilar concerns.

9. V irtually all of the latter concerns are apprehended rather than actual, and are based on conjecture about

what might happen rather than actual cases that have led to undesirable results.

10. Two alternative groups of proposals were put forward in the Report. The first group envisaged

comprehensive changes based on the 1972 revisions to the corresponding provisions of Article 9 of the

Uniform Commercial C ode. The second group of proposals described a series of ad hoc amendments to

section 36 intended to clarify its operation without altering it in any fundam ental way.

11. Reaction to the first group of M acDougall proposals, ibid., was generally negative.

12. A body has come into being to act as a clearing house for work on, and refinem ents to, the M odel Act -

the Canadian Conference on Personal Property Security Law.

3

The provisions of the Personal Property Security Act in relation tofixtures have given rise to a certain amount of controversy in thisprovince. These concerns emanate almost entirely from lawyers in8

the province engaged in business law and real property transactions.Some of the concerns were clearly based on disagreements with thepolicy of the PPSA in relation to fixtures. The concerns of othersfocused more on drafting and what is perceived to be the uncertaintyof outcome in particular circumstances. These concerns, initially put9

to government officials, led to the reference of this topic to the LawReform Commission.

To assist us in this reference the Commission engaged aconsultant, Professor Bruce MacDougall, of the Faculty of Law,University of British Columbia. At our request, ProfessorMacDougall spent a good deal of time consulting with members ofthe commercial and real property bar to identify their concerns withgreater precision. Professor MacDougall was also asked to identifyand bring forward a range of possible modifications to the PPSA thatrespond to the concerns.

In May 1992 Professor MacDougall submitted to us a reportwhich embodied the results of his consultation and some possibilitiesfor reform. The MacDougall Report was reproduced and circulated10

among key practitioners and legal academics with an invitation tocomment. 11

C. This Report

The recommendations made in this Report have been largelyshaped by the consultation process described. An importantconsideration, however, has been to maintain uniformity withcomparable legislation in other provinces. The British ColumbiaPPSA is virtually identical to that in force in Alberta and this versionis what is sometimes referred to as the “Western Canadian ModelPPSA.” It is under active consideration for adoption in Saskatche-12

wan, Manitoba, the Northwest Territories and New Brunswick.


13. See Appendix E .

4

Uniformity in commercial law matters is not easily achieved and onceachieved should not be lightly abandoned.

Our general conclusion is that the state of the PPSA, so faras it concerns fixtures, is generally satisfactory. Section 36, inparticular, achieves a careful balancing of interests. With twopossible exceptions, we do not believe any major changes in theory,13

structure or approach to the treatment of fixtures in the PPSA iscalled for.

This does not mean, however, that the PPSA has reached astate of near-perfection as some of its defenders seem to suggest. Inparticular, achieving a proper structure of definitions and legislativestatements concerning the application of the PPSA to fixtures hasnot been free of difficulty. Our principal recommendations in thisReport, therefore, focus on ways of achieving a smoother integrationof fixtures into the overall structure of the Act and addressing someperceived drafting ambiguities that have led to serious concerns.These recommendations emerge in the following chapter.

There are two issues which we have identified as appropriatefor “further study.” These issues are described in Appendix E. Tohave pursued both or either of these with a view to formulating afinal position would have significantly delayed the production of thisReport. Submissions in relation to these issues would be welcome.

It should be stressed also that this Report covers only oneaspect of a larger project. The importance placed on the fixturesissue by the bar and the prominence given to it in the terms ofreference from the Attorney General led us to proceed on it as amatter of priority. This is an interim report.

1. A “licence” is a statutory permit to harvest timber on Crown land. Analytically it may be a m ere

“personal right” rather than property.

2. W hy the drafter omitted licences from this recitation is not clear.

3. See e.g. section 18(6).

4. S. 12 provides that a security interest attaches when “the debtor has rights in the collateral” and

“collateral” is defined only with reference to personal property, which does not include fixtures.

5. B.C. Reg. 67/91 Reg. 1(4). S . 76(1)(l) of the PPSA allows the making of a regulation “defining a word

or expression used in this Act.” The absence of any definition of personal property in the PPSA itself left

government free to provide such a definition by regulation. The comparable legislation of

both A lberta and O ntario does contain a definition of “personal property” which either directly or indirectly

embraces fixtures. The O ntario Personal Property Security A ct, R .S.O . 1990, c. P-10, s. 1 does this directly by

mentioning fixtures as one element in a list of enumerated types of property that constitute “personal

property.” The Alberta Personal P roperty Security A ct, S.A . 1988, c. P-4.05, s. 1, achieves this indirectly. Its

definition of “personal property” includes a reference to “goods” which in turn (like the British Columbia

PPSA) is defined to include fixtures.

5

CHAPTER II REFORM

A. Definition Issues

1. THE PROBLEM

The Personal Property Security Act applies to more than personalproperty. It applies to fixtures and growing crops which are interestsin land. It also applies to a licence (essentially a right to harvesttimber) which, if it is property at all, is probably also an interest in1

land. The Personal Property Security Act contains an elaborate structure ofdefinitions some of which use the expression “personal property” (aterm that is not defined in the PPSA itself) as a unit of reckoning. Insome cases, the drafter of the PPSA has had regard to the limitationsof the concept of “personal property” and linked that term withother kinds of property embraced by the Act. Paragraph (a) of thedefinition of “proceeds” therefore speaks of “personal property,fixtures and crops.” In other places, however, the drafter has used2

“personal property” in contexts which suggest that it was meant toinclude fixtures and crops.3

A critical omission of this kind is to be found in the definitionof collateral in section 1:

“collateral” means personal property that is subject to a security interest;

This definition, when read into section 12 of the Act, raises thepossibility that a security interest can never attach to a fixture4

because a fixture is not personal property.

An attempt was made to repair this omission in a 1991amendment to the PPSA Regulations which set out the followingdefinition:5

CHAPTER II: REFORM

6. B.C . Reg. 215/91.

7. See n. 5, supra .

6

“personal property”, in the Personal Property Security Act and in this Regulationincludes fixtures and crops.

Many practitioners regarded this as an unsatisfactory solution. Inparticular, it led to fears that every mortgage of real property whichalso extended to fixtures would have to be the subject of a separatefiling under the PPSA as to the fixtures (with perhaps a further filingin the Land Title Office) in order to fully protect the interest. Theresponse was a further regulation much more complicated than itspredecessor which in its attempt to clarify matters, in the view ofmany, only appears to obscure the position more thoroughly:6

1. (4) Except as otherwise provided in subsection (4.1) and notwithstandingthat the fixture or crop remains part of the land to which it is affixed orattached and that a dealing with land is a dealing with the fixtures and cropsaffixed or attached to the land, “personal property” in the Personal PropertySecurity Act and this regulation is conclusively deemed to include a fixture orcrop for all purposes related to a security interest in the fixture or cropincluding, without limitation, the validity, attachment, perfection, priority,subordination, enforceability or realization of, or other dealing with, thatsecurity interest.

1. (4.1) Subsection (4) does not apply(a) for any purpose other than a purpose of the Personal

Property Security Act and this regulation,(b) to an interest which is created by words that also create

or transfer an interest in the land to which the fixture orcrop is affixed or attached, or

(c) to the creation of an interest in a fixture or crop by thegranting of a lease of the land to which the fixture orcrop is affixed or attached.

1. (4.2) For the purpose of interpreting subsection (4.1)(b) words that createan interest in a fixture or crop are not “words that also create or transfer aninterest in the land to which the fixture or crop is affixed or attached” solelybecause the words creating the interest in the fixture or crop are containedin a document which also contains other words that create or transfer aninterest in the land.

We set out this regulation in full, not with the expectation that thereader will understand it, but merely to illustrate the morass intowhich the drafter has been led on this question.

In British Columbia, the complicated regulation might berepealed and replaced by definitional changes modeled on theAlberta or Ontario legislation. That alone, however, would give rise7

to the same set of concerns which greeted the first version of theregulation -- that it swept more into the PPSA than was intended. A

CHAPTER II: REFORM

8. The definition of “intangible” also contains a reference to personal property, in the compendious sense,

but the expression is linked with “goods” which is defined to include fixtures. The structure of the definition

(so far as fixtures are concerned) operates to exclude from “personal property” som ething that was never

included in it, so no problem is created.

7

change of this kind in the definitions would have to be matched bya provision which somehow makes it clear that the Act has noapplication to an interest in fixtures which arises purely as a result ofa dealing with an interest in land. The net effect of embracing thisapproach would be to transfer the solution embodied in the regula-tion into the Act itself with the hope, but no guarantee, that thedrafting could be improved.

2. FINDING A SOLUTION

(a) Scope of the Problem

The search for alternatives led us to examine the variouscontexts in which the expression “personal property” is actually usedin the PPSA. This was done through a computer assisted search ofthe text of the Act and amending legislation. Interestingly, theexpression does not occur that frequently and the possibility that theAct in using “personal property” might have inadvertently excludedfixtures from the application of a particular provision is less seriousthan it might first appear. Moreover, in some of the most importantcases the drafter has expressly addressed the status of fixtures as thedefinitions of both “goods” and “proceeds” illustrates:

“goods” means tangible personal property, fixtures, crops and...

“proceeds” means (a) identifiable or traceable personal property, fixtures and crops...

This leaves only a handful of provisions in which the drafter appearsto have used “personal property” as a convenient compendiousexpression for all property regulated by the PPSA. They are:8

Section 1 - “collateral”: As noted above, this term isdefined to mean “personal property” that is subject toa security agreement.

Section 10: In section 10 “personal property” is usedto stipulate the contents of a statement which mustappear in the security agreement if the agreement is tomeet the writing requirements that will make it ef-fective against third parties.

CHAPTER II: REFORM

9. As to crops see subheading 3, infra.

8

Section 18: Section 18 permits various persons toobtain information and particulars concerning asecurity agreement from the secured parties. Theseinclude “a person with an interest in personal prop-erty of the debtor.” The expression “personal prop-erty” also appears in the context of provisions thatare concerned with identifying the property that iscollateral under a particular security agreement.

Section 55: Section 55 describes the application of Part5 of the PPSA which is concerned with rights andremedies on default. Subsections (4), (5), (5.1) and (6)are aimed at simplifying enforcement where the sameobligation is secured by both an interest in land anda security interest to which the PPSA applies. Inthese provisions “personal property” is used incontradistinction to the land.

Identifying precisely how the term “personal property” is used in theAct allows us to examine several possible solutions more closely.

(b) Wider use of the “personal property, fixtures andcrops” Formulation

Two definitions (“goods” and “proceeds”) link “personalproperty” with fixtures and crops. We believe that this approachshould also be taken with respect to the definition of “collateral.”The current definition should be replaced by one which refers topersonal property, fixtures and crops.9

This strategy, however, does not work well in the otherprovisions where the term “personal property” is used repeatedly.Adopting it on a wider basis would only add further bulk to a pieceof legislation which many regard as “over-drafted” in its currentform. We believe other approaches are preferable.

(c) Redraft to Eliminate References to “personal property”

One or more of these provisions might simply be redraftedto eliminate the references to “personal property” in favour of otherdefined terms in the Act. Section 55, in particular, lends itself to this

CHAPTER II: REFORM

10. Section 55(4) currently provides:

(4) Subject to any other enactment or applicable law to the contrary, where the sam e obligation is

secured by an interest in land and a security interest to which this Act applies, the secured party may

(a) proceed under this Part as to the personal property, or

(b) proceed as to both the land and the personal property as if the personal property were

land, in which case

(i) the secured party's rights, remedies and duties in respect of the land apply to the per-

sonal property with necessary m odifications as if the personal property were land, and

(ii) this Part does not apply.

11. For exam ple, no less than 11 sections of the PPSA contain a subsection which provides that “in this

section `secured party' includes a receiver.” See ss. 17, 36-38, 55-60, 63 and 69.

9

treatment. In subsection (4) the opening flush might be amended torefer to “a security interest in collateral to which this Act applies...”This would permit subsequent references to be to the “collateral”rather than “personal property.”10

Similar drafting solutions may be possible for sections 10 and18 but they are less obvious. A different solution is available forthese sections.

(d) Define “personal property” for the Purposes ofParticular Sections

The solution we suggest for sections 10 and 18 is to includein each of them a definition subsection which provides an“extended” definition of personal property. A subsection which setsout one or more definitions that apply to that section only is acommon feature of the drafting of the PPSA. Very often, thecontent of these special definitions is identical. A subsection might11

be added to each of sections 10 and 18 stating that:

(x) In this section “personal property” includesfixtures and crops.

This would be consistent with the solution the PPSA adopts toresolve similar problems when they arise.

We believe that a definition that is tightly targeted on twosections is unlikely to raise the kinds of concerns that the originaldefinition of personal property in the regulations created. It is clearlyintended to have a very limited and narrow effect.

It should be noted that this approach will require that cautionbe exercised by those who may be drafting amendments to the PPSAin the future. It would likely raise a presumption that when“personal property” is used in other sections, the common law

CHAPTER II: REFORM

10

meaning is intended. Every future drafter who uses the expressionwill have to consider whether either the common law or the extendedmeaning of personal property is intended and, in the latter case,ensure that the amendment includes an appropriate definition.

CHAPTER II: REFORM

12. E.g., a copy of a security agreement covering a licence m ay not be the subject of a demand under s.

18(2)(a).

13. The expression “personal property” also appears in the Regulations so the repeal of this definition will

require some further amendment to them. W e have not been able to do a computer search on the regulations

to identify the particular provisions that call for attention, but our recommendations concerning the PPSA

itself should provide adequate guidance on dealing with them.

11

3. CROPS AND OTHER INTERESTS

Regulation 215/91 also covers crops. A legislative solutionto the fixtures problem which results in the repeal of the regulationwill affect how the PPSA applies to crops. Whatever approach isadopted to ensure that the concept of a PPSA security interest infixtures fits comfortably into the conceptual structure of the Act, itis clear that crops must be given a parallel treatment. The issues areidentical.

If one or more of the recommendations we are making is tobe adopted, it would also be sensible to review the position oflicences. It is doubtful whether a licence is personal property and thevarious provisions that use “personal property” in a compendiousway probably do not apply to a licence that is subject to a securityagreement. This may yield anomalous results. Virtually all of the12

suggestions we have made respecting the need to clarify the applica-tion of the PPSA to fixtures are also applicable to licences. More-over, if licences are to be more fully integrated into the definitions ofthe Act some reconsideration of the definition of proceeds is calledfor. As the definition currently stands a licence could never be “pro-ceeds.”

4. RECOMMENDATIONS

Our formal recommendations in this aspect of the fixturesreference are set out below. They go somewhat beyond the terms wehad originally set for ourselves in that our recommendations, ofnecessity, extend to crops and we have provided optional recommen-dations concerning licences where they raise analogous issues. Theportions of the recommendations that relate to licences have beensquare bracketed for convenient reference.

The Commission recommends:

1. Subsections (4), (4.1) and (4.2) of section 1 of thePersonal Property Security Regulation as amended by B.C. Reg.215/91 be deleted.13

CHAPTER II: REFORM

12

2. In the Personal Property Security Act the definition of “collat-eral” be deleted and the following substituted:

“collateral” means personal property, fixtures,[licences,] and crops that are subject to a securityinterest;

3. Subsection (4) of section 55 be deleted and a provisioncomparable to the following substituted:

(4) Subject to any other enactment or applicablelaw to the contrary, where the same obligation issecured by an interest in land and a securityinterest in collateral to which this Act applies, thesecured party may

(a) proceed under this Part as to the collateral,or

(b) proceed as to both the land and the collat-eral as if the collateral were land, in whichcase(i) the secured party's rights, remedies and

duties in respect of the land apply to thecollateral with necessary modificationsas if the collateral were land, and


4. Subsections (5) and (5.1) of section 55 be amended bydeleting “personal property” wherever it occurs andsubstituting “collateral.”

5. The provision comparable to the following be added assection 10 (1.1) and section 18 (1.1):

(1.1) In this section “personal property” in-cludes fixtures, [licences] and crops.

B. Section 36(3): “person with an interest in the land”

In addition to the concern addressed by the previous recom-mendations, one other concern was voiced with such frequency andurgency by those consulted that we felt it should be addressed in thisReport. This concern revolves around the final words of section36(3). That subsection states:

CHAPTER II: REFORM

13

(3) Except as provided in this section or in section 30, a security interest ingoods that attaches before or at the time the goods become fixtures haspriority with respect to the goods over a claim to the goods made by a personwith an interest in the land.

Suppose a lender has both a mortgage (an“interest in the

land”) and an interest recognized under the PPSA. Does section36(3) prevent the lender from relying on the PPSA interest? Thereis no policy reason why section 36(3) should have that effect.Undoubtedly the drafters of the PPSA intended that section 36(3)give priority only over that of a “person” whose interest in the goodsarises only because the goods are, in law, part of the land. If thatperson also asserts a claim to the fixture based on a separate interestin the personal property of the debtor, section 36(3) has no applica-tion even though the person also has an interest in the land. Thecompetition would be resolved by other priority rules contained inthe PPSA. This is the result that would flow from an interpretationof section 36(3) that aimed to give effect to its purpose.

A literal reading of this provision, however, could lead to aninterpretation that yields a different result -- so long as a person hasan interest in the land, that person will never be able to get priorityin the goods, as goods, as against a person who does not have aninterest in the land and whose security interest in the goods attachedbefore or at the time the goods became fixtures. The language ofsection 37(3) raises an identical concern with respect to crops.

We believe that sections 36(3) and 37(3) should be revised toensure that the “purposive” interpretation prevails. A number offormulations were suggested by those who raised this concern. Theone which commends itself to us is set out below.


6. The Personal Property Security Act be revised by enactingamended sections 36((3) and 37(3) similar to thefollowing:

36. (3) Except as provided in this section or insection 30, a security interest in goods thatattaches before or at the time the goods be-come fixtures has priority with respect to thegoods over an interest in the goods arising from an interestin the land to which they are attached.

CHAPTER II: REFORM

14. (1988) 32 B.C.L.R. (2d) 67 (C .A.)

15. Ibid at 90.

14

37. (3) Except as provided in this section, asecurity interest in crops has priority withrespect to the crops over an interest in the crops arisingfrom an interest in the land on which they are grown.

[emphasis added]

C. Fraud and Notice

Rarely does the PPSA mention actual knowledge or fraud asan element which can affect the existence or priority of interests orrights. Sections 36(4) and 36(5)(b) are exceptions in that they speakof a person acting “without fraud” and of an interest being “acquiredwithout fraud.” The reference to these concepts has concerned anumber of practitioners in the real estate bar because, it is argued, itcould lead to the application in the PPSA context of the doctrine ofnotice as set out in the controversial case of Lloyds Bank of Canada v.Lumberton Mills Ltd.14

In that case a debenture which prohibited the creation ofprior charges was registered in the office of the Registrar of Compa-nies. Was it binding on another party who subsequently was giventhe right to a general lien on equipment by the same company whichhad executed the debenture? The Court of Appeal held that the lienholder should be taken to have constructive notice of the debentureand its prohibition.

It was accepted that constructive notice could not exist onany basis other than registration. Esson J.A. noted that it was adangerous doctrine because it is “contrary to the truth,” the gist ofit being that a person who does not know the true facts will be heldto be in the same position as if the facts were known. Esson J.A.continued:15

The question in such cases is, in essence, in what circumstances the failureto inquire will import notice of the facts which would have been learned hadinquiry been made. Here, the inquiry which could have been made was tosearch in the office of the registrar. Had that been done, Coast would havelearned of the prohibitions against creating prior charges. I conclude, on thebasis of the authorities dealing with the equitable doctrine, that Coast mustbe held to have had constructive notice of the contents of the debenture.

CHAPTER II: REFORM

16. R .C.B.C. 1979, c. 219 am. S.B.C. 1982, c. 60, s. 7; S.B.C. 1990, c. 11, s. 69.

15

No statutory provision, it was held, modified the equitable doctrine.

The fear expressed is that a person who has, or intends toacquire, an interest in the land might be affected not only by a noticefiled under section 49 but also by any actual notice or by constructivenotice the person may be deemed to have by virtue of a financingstatement registered in the personal property registry.

To address this concern sections 29(3) and (4) of the LandTitle Act were enacted. Section 29 provides:16

29. (1) Except in the case of fraud in which he has participated, no personcontracting or dealing with or taking or proposing to take from a registeredowner

(a) a transfer of land; or(b) a charge on land, or a transfer or assignment or subcharge of

the charge,shall be affected by a notice, express, implied, or constructive, of anunregistered interest affecting the land or charge other than

(c) an interest, the registration of which is pending;(d) a lease or agreement for lease for a period not exceeding 3

years where there is actual occupation under the lease oragreement; or

(e) the title of a person against which the indefeasible title is voidunder section 23(3),

notwithstanding a rule of law or equity to the contrary.

(2) For the purpose of this section 'registered owner' includes a person whohas made an application for registration and becomes a registered owner asa result of that application.

(3) Subject to section 49 of the Personal Property Security Act, no personcontracting or dealing with, taking from or proposing to take from aregistered owner, an estate or interest in land, or a transfer or assignment ofan estate or interest in land, is affected by a financing statement registeredunder that Act whether or not he had express, constructive or implied noticeor knowledge of the registration.

(4) The fact that the person who is contracting with, dealing with, takingfrom or proposing to take from a registered owner under subsection (1) hadknowledge of a financing statement registered under the Personal PropertySecurity Act, or that the person could have obtained knowledge of thefinancing statement by searching the personal property registry establishedunder that Act, is not evidence of fraud or bad faith for the purposes ofsubsection (1).

Those provisions go some way to alleviate the concern about theLumberton decision. They deal expressly with the issue of constructivenotice by virtue of registration of a financing statement.

CHAPTER II: REFORM

17. Personal Property Security Amendment A ct, 1992, S.B.C. 1992, c. 48, s. 8.

16

A similar concern underlies section 47 of the PPSA. Until1992 that provision read as follows:

47. Registration of a financing statement in the registry is not express,constructive or implied notice or knowledge of its contents to any person.

In 1992 it was amended and now provides:17

47. Registration of a financing statement in the registry does not by itselfconstitute express, constructive or implied notice to any person of, orexpress, constructive or implied knowledge on the part of, any person of

(a) the financing statement or its contents, or(b) the security interest perfected by the financing statement or the

contents of any security agreement.

The effect of the 1992 amendment is to extend the scope of the“thing” of which no constructive notice may be taken from thefinancing statement to include the underlying security interest andagreement.

We believe that section 29 of the Land Title Act should beamended to enlarge its scope in a similar fashion. It would provideeven greater comfort if it included not only a reference to financingstatements but also to security agreements. It is usually in thesecurity agreements and not in the financing statements thatrestrictions and prohibitions will be found.


7. The Land Title Act be amended by replacing subsections(3) and (4) of section 29 with provisions similar to thefollowing:

(3) Subject to section 49 of the Personal PropertySecurity Act, no person contracting or dealing with,taking from or proposing to take from a regis-tered owner, an estate or interest in land, or atransfer or assignment of an estate or interest inland, is affected by

(a) a financing statement registered un-der that Act,

(b) the security interest perfected by thefinancing statement, or

(c) the contents of the security agreement

CHAPTER II: REFORM

17

whether or not that person had express, con-structive or implied notice or knowledge of theregistration.

(4) The fact that a person who is contractingwith, dealing with, taking from or proposing totake from a registered owner under subsection(1) had knowledge of

(a) a financing statement registered un-der the Personal Property Security Act, or


(c) the contents of the security agreementor that the person could have obtained knowl-edge of the financing statement or the existenceof the security interest or security agreement bysearching the personal property registry estab-lished under that Act, is not evidence of fraud orbad faith for the purposes of subsection (1).

D. Conclusion and Summary of Recommendations

Except for two issues that we believe require furtherconsideration, it is our conclusion that the PPSA strikes a fair balanceamong the needs and legitimate expectations of secured financiers(whether they rely on land or personal property), owners and otherswith interests in land. It is undeniable that the PPSA gives a landowner the power to create an effective security interest in fixtures incircumstances where that was not possible before. Some view thisflexibility as a significant erosion of the rights of those whoseinterests in fixtures arise under real property law.

It may be true that such a person enjoys a less favourableposition under the new regime, but it cannot be said that a mortgagelender (land) loses any right to a fixture that had been acquired as aresult of the mortgage. What the new regime does is to prevent thatmortgage lender from automatically getting a prior right to newfixtures as a debtor acquires them irrespective of the fact that someother financier may regard them as collateral under a securityagreement.

CHAPTER II: REFORM

18. See n. 12 of Chapter I.

19. See n. 13 supra as to the use of the expression “personal property” in the regulations.

20. The position of licences and the status of our recommendations in relation to them is discussed supra

at p. 12.

18

It flows from our endorsement of the general theory ofsection 36 that any reform measures should be directed towardinsuring that its theory and purpose are carried out most effectively.A number of potential changes to the PPSA have been suggested tous. Many of these suggestions have merit although they do not strikeus as requiring urgent or immediate action. We believe the mostsensible course is to draw these to the attention of the CanadianConference on Personal Property Security Law for their review.18

As discussed in this and the preceding Chapter, two of theconcerns expressed do suggest a need for immediate action andrecommendations are set out below. A minor amendment to theLand Title Act is also set out.

The Commission recommends that:

1. Subsections (4), (4.1) and (4.2) of section 1 of thePersonal Property Security Regulation as amended by B.C. Reg.215/91 be deleted.19

2. In the Personal Property Security Act the definition of “collat-eral” be deleted and the following substituted:

“collateral” means personal property, fixtures,[licences,] and crops that are subject to a secu-20

rity interest;

3. Subsection (4) of section 55 be deleted and a provisioncomparable to the following substituted:

(4) Subject to any other enactment or applicablelaw to the contrary, where the same obligation issecured by an interest in land and a securityinterest in collateral to which this Act applies, thesecured party may

(a) proceed under this Part as to the collateral,or

(b) proceed as to both the land and the collat-eral as if the collateral were land, in whichcase

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19

(i) the secured party's rights, remedies andduties in respect of the land apply to thecollateral with necessary modificationsas if the collateral were land, and


4. Subsections (5) and (5.1) of section 55 be amended bydeleting “personal property” where ever it occurs andsubstituting “collateral.”

5. The provision comparable to the following be added assection 10 (1.1) and section 18 (1.1):

(1.1) In this section “personal property” in-cludes fixtures, [licences] and crops,

6. The Personal Property Security Act be revised by enactingamended sections 36((3) and 37(3) similar to thefollowing:

36. (3) Except as provided in this section or insection 30, a security interest in goods thatattaches before or at the time the goods be-come fixtures has priority with respect to thegoods over an interest in the goods arising from an interestin the land to which they are attached.

37. (3) Except as provided in this section, asecurity interest in crops has priority withrespect to the crops over an interest in the crops arisingfrom an interest in the land on which they are grown.

[emphasis added]

7. The Land Title Act be amended by replacing subsections(3) and (4) of section 29 with provisions similar to thefollowing:

(3) Subject to section 49 of the Personal PropertySecurity Act, no person contracting or dealing with,taking from or proposing to take from a regis-tered owner, an estate or interest in land, or atransfer or assignment of an estate or interest inland, is affected by

CHAPTER II: REFORM

20

(a) a financing statement registered un-der that Act,


(c) the contents of the security agreementwhether or not that person had express, con-structive or implied notice or knowledge of theregistration.

(4) The fact that a person who is contractingwith, dealing with, taking from or proposing totake from a registered owner under subsection(1) had knowledge of

(a) a financing statement registered un-der the Personal Property Security Act, or


(c) the contents of the security agreementor that the person could have obtained knowl-edge of the financing statement or the existenceof the security interest or security agreement bysearching the personal property registry estab-lished under that Act, is not evidence of fraud orbad faith for the purposes of subsection (1).

CHAPTER II: REFORM

21

E. Acknowledgements

We would like to acknowledge the valuable contribution ofProfessor Bruce MacDougall who continues to assist us as a consul-tant on this project. We stress, however, that the conclusions andrecommendations set out are the Commission's own and are notnecessarily shared by Professor MacDougall. A variety of individualshave provided response and input. This includes the members of theConsultative Committee constituted by the Minister of Finance andCorporate Relations to advise on the Personal Property Security Act andindividual members of the Canadian Conference on PersonalProperty Law who took the time to write. Our thanks go to all ofthem.

As work on this reference moves forward into its next phase,we look forward to working with these various bodies and individu-als in the same spirit of happy cooperation that characterized theinitial phase.

22

23

APPENDIX A

PERSONAL PROPERTY SECURITY ACTS.B.C. 1989, c. 36

(Selected Provisions and Regulations)

1. (1) In this Act

“building” means a structure, erection, mine or works built, constructed or openedon or in land;

“building materials” means materials that are incorporated into a building andincludes goods attached to a building so that their removal

(a) would necessarily involve the dislocation or destruction of some otherpart of the building and cause substantial damage to the building apartfrom the loss of value of the building resulting from the removal, or

(b) would result in the weakening of the structure of the building or theexposure of the building to weather damage or deterioration,

but does not include(c) heating, air conditioning or conveyancing devices, or(d) machinery installed in a building or on land for use in carrying on an

activity inside the building or on the land;

“collateral” means personal property that is subject to a security interest;

“crops” means crops, whether matured or otherwise, and whether naturally grownor planted, attached to land by roots or forming parts of trees or plants attached toland, and includes only trees that

(a) are being grown as nursery stock,(b) are being grown for uses other than the production of lumber and wood

products, or(c) are intended to be replanted in another location for the purpose of

reforestation;

“fixture” does not include building materials;

“goods” means tangible personal property, fixtures, crops and the unborn young ofanimals, but does not include chattel paper, a document of title, an instrument, asecurity, money, trees other than crops until the trees are severed, or minerals orhydrocarbons until they are extracted;

“intangible” means(a) personal property, but does not include goods, chattel paper, a document

of title, an instrument, money or a security, and(b) a licence;

“proceeds” means(a) identifiable or traceable personal property, fixtures and crops

(i) derived directly or indirectly from any dealing with collateral or theproceeds of collateral, and

(ii) in which the debtor acquires an interest, ...

“purchase money security interest” means

APPENDIX A: THE PERSONAL PROPERTY SECURITY ACT

24

(a) a security interest taken in collateral to the extent that it secures paymentof all or part of its purchase price,

(b) a security interest taken in collateral by a person who gives value for thepurpose of enabling the debtor to acquire rights in the collateral, to theextent that the value is applied to acquire the rights,

...

“security interest” means(a) an interest in goods, chattel paper, a security, a document of title, an

instrument, money or an intangible that secures payment or performanceof an obligation, but does not include the interest of a seller who hasshipped goods to a buyer under a negotiable bill of lading or its equivalentto the order of the seller or to the order of an agent of the seller, unlessthe parties have otherwise evidenced an intention to create or provide fora security interest in the goods, and

...

1. (3) A lease under paragraph (b) of the definition of “lease for a term of more thanone year” does not become a lease for a term of more than one year until the lessee'spossession extends for more than one year.

(4) Unless otherwise provided in this Act, the determination whether goods areconsumer goods, inventory or equipment shall be made as of the time the securityinterest in the goods attaches.

(5) Proceeds are traceable whether or not there is a fiduciary relationship between theperson who has a security interest in the proceeds, as provided in section 28, and theperson who has rights in or has dealt with the proceeds.

10. (1) Subject to subsection (2), a security interest is only enforceable against a thirdparty where

(a) the collateral is in the possession of the secured party, or(b) the debtor has signed a security agreement that contains

(i) a description of the collateral by item or kind, or by reference to oneor more of the following: goods, securities, instruments, documentsof title, chattel paper, intangibles, money, crops or licences,

(ii) a statement that a security interest is taken in all of the debtor'spresent and after acquired personal property, or

(iii) a statement that a security interest is taken in all of the debtor'spresent and after-acquired personal property except(A) specified items or kinds of personal property,

or(B) one or more of the following: goods, securities, instruments,

documents of title, chattel paper, intangibles, money, crops orlicences.

(2) For the purposes of subsection (1) (a), a secured party is deemed not to havetaken possession of collateral that is in the apparent possession or control of thedebtor or the debtor's agent.

(3) Subject to subsection (6), a description is inadequate for the purposes ofsubsection (1) (b) if it describes the collateral as consumer goods or equipmentwithout further reference to the kind of collateral.


25

(4) A description of collateral as inventory is adequate for the purposes of subsection(1) (b) only while it is held by the debtor as inventory.

(5) A security interest in proceeds is enforceable against a third party whether or notthe security agreement contains a description of the proceeds.

(6) Where personal property is excluded from a description of collateral, theexcluded property may be described as consumer goods without further referenceto the item or kind of property excluded.

12. (1) A security interest, including a security interest in the nature of a floatingcharge, attaches when

(a) value is given,(b) the debtor has rights in the collateral, and(c) except for the purpose of enforcing rights between the parties to the

security agreement, the security interest becomes enforceable undersection 10,

unless the parties have specifically agreed to postpone the time for attachment inwhich case the security interest will attach at the time specified in the agreement.

18. (1) The debtor, a creditor, a sheriff, a person with an interest in personal propertyof the debtor or an authorized representative of any of them may, by a demand inwriting containing an address for reply and delivered to the secured party,

(a) where an address is in the records of the registry,(i) at the secured party's most recent address in a registered financing

statement that relates to the property, or(ii) at an address of the secured party, whether or not in the records of

the registry, that is more recent than the address referred to insubparagraph (i), or

(b) where no address is in the records of the registry, at the current addressof the secured party,

require the secured party to send or make available to the person making the demandor, if the demand is made by the debtor, to any person at an address specified by thedebtor, any of the information specified in subsection (2).

(2) The information that may be demanded under subsection (1) may be one or moreof the following:

(a) a copy of any security agreement providing for a security interest held bythe secured party in the personal property of the debtor;

(b) a statement in writing of the amount of the indebtedness and of the termsof payment of that indebtedness as of the date specified in the demand;

(c) a written approval or correction of an itemized list of personal propertyattached to the demand indicating which items in the demand are collat-eral as of the date specified in the demand;

(d) a written approval or correction of the amount of the indebtedness andof the terms of payment of the indebtedness as of the date specified in thedemand;

(e) sufficient information as to the location of the security agreement or acopy of it, as specified in the demand, so as to enable a person entitled toreceive a copy of the security agreement to inspect it at that location.


26

(3) A person with an interest in personal property of the debtor is entitled to makea demand under subsection (1) only with respect to a security agreement thatprovides for a security interest in the property in which that person has an interest.

(4) A person who is entitled to make a demand under subsection (1) may demandthat the secured party permit the person to inspect a copy of the security agreementby giving the secured party a written demand to that effect in accordance withsubsection (1).

(5) Where a secured party receives a demand under subsection (4), the secured partyshall permit the person making the demand or his authorized representative toinspect, during normal business hours, the security agreement at the place specifiedby the secured party.

(6) Where a demand is made requiring an approval or correction referred to insubsection (2) (c) and the secured party claims a security interest in

(a) all of the personal property of the debtor,(b) all the personal property of the debtor, other than a specified kind or item

of personal property, or(c) all of a specified kind of personal property of the debtor,

the secured party may indicate this instead of approving or correcting the itemizedlist of the personal property.

(7) Where the secured party is a trustee under a trust indenture, he shall reply to ademand under subsection (1) or (4) within 25 days after he receives it.

(8) Any other secured party shall reply to the demand within 10 days after he receivesit.

(9) Where, without reasonable excuse,(a) the secured party fails to comply with the demand within the specified

period, or(b) in the case of a demand under subsection (1) the secured party's reply to

the demand under subsection (1) is incomplete or incorrect,the person making the demand, may in addition to any other remedy provided forin this Act, apply to a court for an order requiring the secured party to comply withthe demand.

(10) Where a demand is made under subsection (1) or (4) and the person receivingthe demand no longer has an interest in the obligation or property of the debtor thatis the subject of the demand, he shall, not later than 10 days after receiving thedemand, disclose

(a) the name and address of his immediate successor in interest, and(b) if known to him, the current successor in interest.

(11) Where, without reasonable excuse, the person receiving the demand fails tocomply with subsection (10), the person making the demand may, in addition to anyother remedy provided for in this Act, apply to a court for an order requiring theperson to whom the demand has been made to comply with this section.

(12) On application under subsection (9) or (11), the court may make an orderrequiring the secured party or the person receiving the demand to comply with thedemand or to disclose the information, as the case may be.


27

(13) The court may provide for the actual or possible failure of a secured party tocomply with an order under subsection (12) by making one or more of the followingorders either on application or as part of the order under subsection (12):

(a) any order the court considers necessary to ensure compliance with thedemand;

(b) in the case of non-compliance by a secured party or the person receivingthe demand, an order that the security interest of the secured party withrespect to which the demand was made is unperfected or extinguishedand that any related registration be discharged.

(14) On an application(a) under subsection (11), or(b) under this subsection made by

(i) the secured party referred to in subsection (9), or(ii) the person referred to in subsection (10) as receiving the demand,

the court, subject to section 69 (2), may, unless the demand is made by the debtor,exempt the secured party or person receiving the demand in whole or in part fromcomplying with subsections (8) to (10) or may extend the time for compliance.

(15) A secured party who has replied to a demand referred to in subsection (1) isestopped, for the purposes of this Act, against the person making the demand oragainst any other person who can reasonably be expected to rely on the reply fromdenying

(a) the accuracy of the information referred to in subsection (2) (b) to (d) andcontained in the reply to the demand, and

(b) that the copy of the security agreement referred to in subsection (2) (a)that is provided in response to a demand under subsection (1) is a truecopy of that security agreement,

but only to the extent that the debtor or the other person has in fact relied on(c) the information referred to in paragraph (a), or

(d) the accuracy of the copy of the security agreement referred to inparagraph (b).

(16) A successor in interest referred to in subsection (10) is estopped for thepurposes of this Act, against the person making the demand referred to in subsection(1) and any other person who can reasonably be expected to rely on the reply to thedemand, from denying

(a) the accuracy of the information referred to in subsection (2) (b) to (d) andcontained in the reply to the demand, and

(b) that the copy of the security agreement referred to in subsection (2) (a)that is provided in response to a demand under subsection (1) is a truecopy of that security agreement,

but only to the extent that the debtor or the other person has in fact relied on(c) the information referred to in paragraph (a), or(d) the accuracy of the copy of the security agreement referred to in

paragraph (b).

(17) A successor in interest is not estopped under subsection (16) where(a) the debtor or other person who relied on the reply knows that the interest

has been transferred to the successor in interest and knows that person'sidentity and address, or

(b) before making the demand, a financing change statement has beenregistered under section 45 disclosing the successor in interest as thesecured party.


28

(18) The person to whom a demand is made under this section may require paymentin advance of a fee in a prescribed amount for each reply to a demand, but thedebtor is entitled to make a demand and receive a reply to it without charge onceevery 6 months.

(19) A secured party who receives a demand that purports to be made by a personentitled to make it under subsection (1) may act as if the person is, in fact, entitledto make the demand unless the secured party knows that the person is not entitledto make it.

20. A security interest(a) in collateral is subordinate to the interest of

(i) a person who causes the collateral to be seized under legal processto enforce a judgment including execution, garnishment or attach-ment, or who has obtained a charging order or equitable executionaffecting or relating to the collateral,

(ii) a sheriff who has seized or has a right to the collateral under theCreditor Assistance Act,

(iii) a judgment creditor entitled by law to participate in the distributionof property or its proceeds seized under legal process as provided inthe Creditor Assistance Act, and

(iv) a representative of creditors, but only for the purposes of enforcingthe rights of a person referred to in subparagraph (i),

if that security interest is unperfected at the time(v) the interest of a person referred to in subparagraph (i), (ii) or (iv)

arises, or(vi) the judgment creditor referred to in subparagraph (iii) delivers a writ

of execution or certificate to the sheriff under section 3 of the CreditorAssistance Act,

(b) in collateral is not effective against(i) a trustee in bankruptcy if the security interest is unperfected at the

date of the bankruptcy, or(ii) a liquidator appointed under the Winding-up Act (Canada) if the security

interest is unperfected at the date that the winding-up order is made,and

(c) in chattel paper, a document of title, a security, an instrument, money, anintangible or goods is subordinate to the interest of a transferee who(i) acquires an interest under a transaction that is not a security agree-

ment,(ii) gives value, and(iii) acquires the interest without knowledge of the security interest and

before the security interest is perfected.

22. (1) a purchase money security interest in

(a) collateral, other than an intangible, that is perfected not later than 15 daysafter the date the debtor or a third person at the request of the debtor,obtains possession of the collateral, whichever is earlier, or

(b) an intangible that is perfected not later than 15 days after the day thesecurity interest attaches

has priority over the interests of persons referred to in section 20 (a) and (b).


29

30. (1) In this section

“buyer of goods” includes a person who obtains vested rights in goods under acontract to which the person is a party as a consequence of the goods becoming afixture or accession to property in which the person has an interest;

“seller” includes a person who supplies goods that become a fixture or accessionunder a contract with a buyer of goods or under a contract with a person who isparty to a contract with the buyer;

“the ordinary course of business of the seller” includes the supply of goods in theordinary course of business as part of a contract for services and materials.

(2) A buyer or lessee of goods sold or leased in the ordinary course of business of theseller or lessor takes free of any perfected or unperfected security interest in thegoods given by the seller or lessor or arising under section 28 or 29, whether or notthe buyer or lessee knows of it, unless the buyer or lessee also knows that the sale orlease constitutes a breach of the security agreement under which the security interestwas created.

(3) A buyer or lessee of goods that are acquired as consumer goods takes free froma perfected or unperfected security interest in the goods if the buyer or lessee

(a) gave value for the interest acquired, and(b) bought or leased the goods without knowledge of the security interest.

(4) Subsection (3) does not apply to a security interest in(a) a fixture, or(b) goods the purchase price of which exceeds $1 000 or, in the case of a

lease, the market value of which exceeds $1 000.

36. (1) In this section “secured party” includes a receiver.

(2) This section applies to land for which a certificate of title has been issued underthe Land Title Act and to prescribed land or classes of land.

(3) Except as provided in this section and in section 30, a security interest in goodsthat attaches before or at the time the goods become fixtures has priority withrespect to the goods over a claim to the goods made by a person with an interest inthe land.

(4) A security interest referred to in subsection (3) is subordinate to the interest of(a) a person who acquires for value an interest in the land after the goods

become fixtures including an assignee for value of the interest of a personwith an interest in the land at the time the goods become fixtures, and

(b) any person with a registered mortgage on the land who(i) makes an advance under the mortgage after the goods become

fixtures, but only with respect to the advance, or(ii) obtains an order for sale or foreclosure after the goods become

fixtureswithout fraud and before the notice of the security interest is filed in accordance withsection 49.

(5) A security interest in goods that attaches after the goods become fixtures issubordinate to the interest of a person who

(a) has an interest in the land at the time the goods become fixtures and who


30

(i) has not consented to the security interest,(ii) has not disclaimed an interest in the goods or fixtures,(iii) has not entered into an agreement under which a person is entitled

to remove the goods, or(iv) is not otherwise precluded from preventing the debtor from

removing the goods, or(b) acquires an interest in the land after the goods become fixtures if the

interest is acquired without fraud and before the notice of the securityinterest in the goods is filed in accordance with section 49.

(6) A security interest referred to in subsection (3) or (5) is subordinate to the interestof a creditor of the debtor who caused to be registered under the Court OrderEnforcement Act a judgment in the appropriate land title office affecting the land,after the goods become fixtures, and before the notice of the security interest is filedin accordance with section 49.

(7) The interest of a creditor referred to in subsection (6) does not take priority overa purchase money security interest in goods a notice of which is filed in accordancewith section 49 not later than 15 days after the goods are affixed to the land.

(8) A secured party who, under this Act, has the right to remove goods from landshall exercise this right of removal in a manner that causes no greater damage orinjury to the land and to other property situated on it or that puts the occupier of theland to no greater inconvenience than is necessarily incidental to the removal of thegoods.

(9) A person, other than the debtor, who has an interest in the land at the time thegoods that are subject to the security interest become fixtures is entitled toreimbursement for any damages to his interest in the land caused during the removalof the goods, but is not entitled to reimbursement for diminution in the value of theland caused by the absence of the goods removed or by the necessity of replacement.

(10) The person entitled to reimbursement under subsection (9) may refusepermission to remove the goods until the secured party has given adequate securityfor reimbursement.

(11) The secured party may apply to a court for one or more of the following orders:(a) determining the person entitled to reimbursement under this section;(b) determining the amount and kind of security to be provided by the

secured party;(c) designating the depository for the security;(d) authorizing the removal of the goods without the provision of security for

reimbursement under subsection (10).

(12) A person having an interest in the land that is subordinate to a security interestunder this section may, before the goods have been removed from the land by thesecured party, retain the goods on payment to the secured party of the lesser of thefollowing:

(a) the amount secured by the security interest having priority over theinterest;

(b) the market value of the goods if the goods were removed from the land.

(13) The secured party who has a right to remove the goods from the land shall giveto each person, who appears by the records of the land title office to have an interestin the land, a notice of the intention of the secured party to remove the goods andthe notice shall contain


31

(a) the name and address of the secured party,(b) a description of the goods to be removed,(c) the amount required to satisfy the obligation secured by the security

interest,(d) the market value of the goods,(e) a description of the land to which the goods are affixed, and(f) a statement of intention to remove the goods unless the amount referred

to in subsection (12) is paid on or before a specified date that is not lessthan 15 days after the notice is given in accordance with subsection (14).

(14) A notice referred to in subsection (13) shall be given at least 15 days beforeremoval of the goods and may be given in accordance with section 72 or byregistered mail addressed to the address of the person to be notified as it appears inthe records of the land title office.

(15) A person entitled to receive a notice under subsection (14) may apply to a courtfor an order postponing removal of the goods from the land.


(2) This section applies to land for which a certificate of title has been issued underthe Land Title Act and to prescribed land or classes of land.

(3) Except as provided in this section, a security interest in crops has priority withrespect to the crops over an interest in the crops claimed by a person with an interestin the land.

(4) A security interest referred to in subsection (3) is subordinate to the interest of(a) a person who acquires for value an interest in the land while the crops

are growing crops, including an assignee for value of the interest of aperson with an interest in the land while the crops are growing crops,and

(b) a person with a registered mortgage on the land who(i) makes an advance under the mortgage after the crops become

growing crops, but only with respect to the advance, or(ii) obtains an order for sale or foreclosure after the crops become

growing cropswithout fraud and before the notice of the security interest in the growing crops isfiled in accordance with section 49.

(5) A security interest referred to in subsection (3) is subordinate to the interest ofa creditor of the debtor who causes to be registered, in accordance with the CourtOrder Enforcement Act, a judgment in the appropriate land title office affecting theland on which the crops are growing before the notice of the security interest is filedin accordance with section 49.

(6) The interest of a creditor referred to in subsection (5) does not take priority overa purchase money security interest in the crops, or a security interest in the cropsreferred to in section 34 (8), a notice of which is filed in accordance with section 49not later than 15 days after the time the security interest in the crops attaches.

(7) Section 36 (8) to (15) applies to seizure and removal of growing crops from land.


32

47. Registration of a financing statement in the registry does not by itself constituteexpress, constructive or implied notice to any person of, or express, constructive orimplied knowledge on the part of, any person of

(a) the financing statement or its contents, or(b) the security interest perfected by the financing statement or the contents

of any security agreement.

49. (1) In this section

“fee” means the prescribed fee payable under the Land Title Act for the filing ofnotices in the land title office;

“register” has the same meaning as in the Land Title Act;

“registrar” means the registrar of titles for the land title district in which land affectedby a security interest is located;

“secured party” includes an assignee referred to in subsection (6);

“security interest” means a security interest in a fixture under section 36 or growingcrops under section 37.

(2) A secured party may, on application and on payment of the fee, file in the properland title office a notice of a security interest signed by the secured party or thesecured party's agent setting out

(a) a description of the land affected by the notice that is sufficient for theregistrar to identify it in his or her records,

(b) the name and address of the debtor and the secured party,(c) the expiry date of the notice, if any,(d) a description of the collateral by which it may be readily identified, and(e) other prescribed information,

and the registrar shall file the notice and make an entry of it in the register.

(3) The filing of a notice under subsection (2) is notice, from the date and time theapplication was received by the registrar, of the security interest, to every persondealing with the land.

(4) After its expiry date, if any, a notice of a security interest is of no effect and theregistrar

(a) on the application of any person interested in the land and on payment ofthe fee, or

(b) on his or her own initiativemay cancel the entry of the notice on the register.

(5) Where a secured party wishes to extend an expiry date specified in a notice filedunder subsection (2), he may, on application and on payment of the fee, file a noticeof extension signed by the secured party setting out

(a) a description of the land affected by the notice that is sufficient for theregistrar to identify it in his or her records,

(b) the extended expiry date,(c) the filing number of the notice under subsection (2), and(d) other prescribed information,



33

(6) Where a secured party has assigned a security interest in respect of which a noticehas been filed under this section, the assignee may, on application and on paymentof the fee, file a notice of the assignment signed by the assignee setting out

(a) the name and address of the assignee,(b) a description of the land affected by the notice that is sufficient for the

registrar to identify it in his or her records,(c) the filing number of the notice under subsection (2), and(d) other prescribed information,


(7) The registrar,(a) on receipt of a notice of cancellation signed by the secured party or the

secured party's agent setting out(i) a description of the land affected by the notice that is sufficient for

the registrar to identify it in his or her records, and(ii) the filing number of the notice under subsection (2), and

(b) on application and payment of the feeshall, subject to subsection (8), cancel the entry of the notice filed under subsection(2) in the register.

(8) Where a notice of cancellation under subsection (7)(a) is expressed to be a partial cancellation, and(b) contains a description of the collateral that has been released from the

security interest,the registrar shall file the notice and make an entry of it in the register.

(9) The registrar is not under any duty to inquire into or verify whether or not thesignature of a person on a notice filed under subsection (7) or (8) is the signature ofthe secured party.

(10) Where in respect of a notice registered under this section(a) all of the obligations under the security agreement to which the notice

relates have been performed,(b) the secured party has agreed to release part or all of the collateral

described in the notice,(c) the description of the collateral contained in the notice includes an item

or kind of property that is not collateral under a security agreementbetween the secured party and the debtor,

(d) the security agreement to which the notice relates no longer existsbetween the secured party and the debtor, or

(e) the item or kind of property described in the notice is not affixed to theland to which the notice relates,

the debtor named in the notice or any person having a registered interest in the landmay give a written demand in accordance with subsection (12) to the secured party.

(11) A demand referred to in subsection (10) shall require that the secured party, notlater than 40 days after the demand is given, deliver to the person making thedemand a signed notice of amendment, extension or cancellation, whichever thedemand specifies.

(12) The demand referred to in subsection (10) may be given(a) in accordance with section 72, or(b) by registered mail to,

(i) where a notice of assignment under subsection (6) has not been filed,the address of the secured party set out in a notice filed undersubsection (2), or


34

(ii) where a notice of assignment under subsection (6) has been filed, theaddress of the secured party set out in that notice.

(13) The registrar, on receipt of(a) a true copy of the demand,(b) an affidavit of the person who gave the demand verifying that

(i) the demand was given in accordance with subsection (12),(ii) the copy referred to in paragraph (a) is a true copy,(iii) the person is not aware of any proceeding of the secured party to

enforce the security interest or to oppose or refute the demand, and(iv) 40 days have expired since the notice was given under subsection

(12),(c) the application of the person who gave the demand, and(d) the fee,

shall make the appropriate entry in the register to effect the filing or cancellationrequested in the demand unless the registrar has received a court order not to makethe entry.

(14) A secured party shall not charge an expense or accept a fee for compliance witha demand made under subsection (10) unless the expense or fee has been agreed toby the parties before the demand was given.


(4) Subject to any other enactment or applicable law to the contrary, where the sameobligation is secured by an interest in land and a security interest to which this Actapplies, the secured party may

(a) proceed under this Part as to the personal property, or(b) proceed as to both the land and the personal property as if the personal

property were land, in which case(i) the secured party's rights, remedies and duties in respect of the land

apply to the personal property with necessary modifications as if thepersonal property were land, and


(5) Subsection (4)(b) does not limit the rights of a secured party who has a securityinterest in the personal property taken before or after the security interest mentionedin subsection (4), and the secured party

(a) has standing in proceedings taken in accordance with subsection (4) (b),and

(b) may apply to the court for conduct of a judicially supervised sale undersubsection (4) (b) and the court may grant the application.

(5.1) For the purposes of distributing the amount received from the sale of land andpersonal property where the price paid is not allocated to the land and personalproperty separately, the amount of the total price that is attributable to the personalproperty is that proportion of the total price that the market value of the personalproperty at the time of the sale bears to the market value of the land and personalproperty at the time of the sale.

(6) Except as provided in section 67, a security interest does not merge merelybecause a secured party has reduced his claim to judgment.



35

(2) Subject to subsection (3) and to sections 36 to 38, on default under a securityagreement,

(a) the secured party has unless otherwise agreed the right to take possessionof the collateral or otherwise enforce the security agreement by anymethod permitted by law,

...


(2) Subject to subsection (3), on application of a debtor, a creditor of a debtor, asecured party, a sheriff or a person with an interest in the collateral, a court maymake one or more of the following orders:

(a) an order, including a binding declaration of right and injunctive relief, thatis necessary to ensure compliance with this Part or section 17, 36, 37 or38;

(b) an order giving directions to a person with respect to the exercise of hisrights or the discharge of his obligations under this Part or section 17, 36,37 or 38;

(c) an order relieving a person from compliance with the requirements of thisPart or section 17, 36, 37 or 38, but only on terms that are just andreasonable to all parties affected;

(d) an order staying enforcement of rights provided in this Part or section 17,36, 37 or 38;

(e) an order necessary to ensure protection of the collateral.

(3) Nothing in subsection (2) (c) and (d) affects the application of sections 58 (3) to(5) and 67.

68. (1) The principles of the common law, equity and the law merchant, exceptinsofar as they are inconsistent with the provisions of this Act, supplement this Actand continue to apply.

(2) All rights, duties or obligations arising under a security agreement, this Act or anyother law applicable to security agreements or security interests shall be exercised ordischarged in good faith and in a commercially reasonable manner.

(3) A person does not act in bad faith merely because the person acts withknowledge of the interest of some other person.

Regulations

1. (4) Except as otherwise provided in subsection (4.1) and notwithstanding that thefixture or crop remains part of the land to which it is affixed or attached and that adealing with land is a dealing with the fixtures and crops affixed or attached to theland, “personal property” in the Personal Property Security Act and this regulation isconclusively deemed to include a fixture or crop for all purposes related to a securityinterest in the fixture or crop including, without limitation, the validity, attachment,perfection, priority, subordination, enforceability or realization of, or other dealingwith, that security interest.

1. (4.1) Subsection (4) does not apply


36

(a) for any purpose other than a purpose of the Personal Property Security Act andthis regulation,

(b) to an interest which is created by words that also create or transfer aninterest in the land to which the fixture or crop is affixed or attached, or

(c) to the creation of an interest in a fixture or crop by the granting of a leaseof the land to which the fixture or crop is affixed or attached.

1. (4.2) For the purpose of interpreting subsection (4.1)(b) words that create aninterest in a fixture or crop are not “words that also create or transfer an interest inthe land to which the fixture or crop is affixed or attached” solely because the wordscreating the interest in the fixture or crop are contained in a document which alsocontains other words that create or transfer an interest in the land.

141. (1) Where a secured party claims a security interest in goods which are or maybecome fixtures or in crops that are growing or to be grown, he shall cause to befiled in the appropriate land title office a notice in Form 16, setting out

(a) the name and address of the secured party,(b) the full name and address of the debtor,(c) a description of the goods or crops by which they may readily and easily

be known and distinguished,(d) the expiry date of the notice or a statement that it is an infinite registra-

tion, and(e) a description of the land to which the goods are or are to be affixed, or

on which the crops are growing or to be grown, sufficient for the purposeof identification in the land title office, including a parcel identifier, ifapplicable,

and any such notice is to be signed by the secured party or his agent and witnessed.

141. (2) Where a secured party who has filed a notice pursuant to subsection (1)renews the notice, assigns, discharges or postpones the security interest or releasespart of the collateral from the security interest, the secured party shall cause to befiled in the land title office where the notice under subsection (1) was filed a noticein Form 17, setting out

(a) the name of the secured party,(b) the description of the land given in accordance with subsection (1)(e),(c) the date the notice was filed pursuant to subsection (1), the date of its

filing and the instrument number assigned to it,(d) in the case of a notice of renewal, the registration life in multiples of one

year or an infinite number of years,(e) in the case of postponement,

(i) the full name and address of the person to whom the interest of thesecured party is being postponed, and

(ii) the nature and instrument number of the interest to which theinterest of the secured party is being postponed,

(f) in the case of a notice of partial cancellation releasing collateral from thesecurity interest, particulars of the collateral deleted from the securedparty's interest,

(g) in the case of a notice of cancellation, a statement to the effect that thenotice mentioned in subsection (1) is wholly cancelled and the securityinterest is discharged,

(h) in the case of a notice of cancellation relating to the release of all collateralon one parcel of land, a description of that parcel of land, and

(i) in the case of a notice of assignment,(i) a statement to the effect that the notice has been assigned, and


37

(ii) the name and address of the person to whom the interest is beingassigned,

and any notice filed pursuant to this subsection must be signed by the secured partyor his agent and witnessed.

38

APPENDIX B

TERMS OF REFERENCE(main study)

1. To examine the relationship between the Personal Property Security Act and the Land TitleAct in their application to property that may have characteristics of both land andpersonal property. Such property includes fixtures, growing crops and rights tothe payment of money which are secured by or arise out of interests in land.

2. To ascertain whether the two acts operate harmoniously and, in their applicationto property referred to in paragraph 1, strike an appropriate balance among

(a) the interests of secured lenders and borrowers who use both registrationsystems,

(b) the interests of other persons affected by the legislation,(c) the interest of the public in achieving a rational and efficient system for

the registration of security interests in property of all kinds, and(d) the interest of the public in maintaining the integrity of the land title

system

3. To make recommendations for changes to either or both Acts as may benecessary to achieve an appropriate balance and bring the Acts into greaterharmony.

4. Without limiting the generality of paragraphs 1 to 3, to consider and makerecommendations on the following issues concerning the taking of securityinterests in fixtures:

(a) to what extent and in what circumstances should the law permit thecreation of a security interest in a fixture separate from the land to whichit is affixed?

(b) where the law permits the creation of a separate security interest in afixture,(i) how should this be accommodated by the general law of real

property and provisions of the Land Title Act?, and(ii) what policies should be adopted in resolving priority competitions

between the holders of security interests in fixtures only and personswhose interests in a fixture arise because they have an interest in theland to which it is affixed?

* W e have used as our point of departure in the creation of this Appendix a memorandum prepared by

Professor R .C .C . Cuming Q .C . on the treatment of fixtures under the B.C . and A lberta versions of the PPSA.

W e are grateful to Professor Cuming for his assistance in this regard. A modified form of the memorandum

has been published as Practice Note 8 in the Personal Property Registry Information Guide Supplementary M aterials published

by the Legal Education Society of A lberta.

1. See, Sale of Goods on Condition Act, R .S.B.C. 1979, c. 373.

2. Ibid . ss. 12 and 13.

3. The com mon law position may also have been modified, although in a less obvious way, by chattel

mortgage legislation. The Chattel M ortgage A ct, R .S.B.C. 1979, c. 48, s. 1(1) contemplated a chattel m ortgage on

“trade machinery and fixtures and growing crops when separately assigned or charged” in defined

circumstances (definition of “chattels”).

4. In 1972 this section was substantially rewritten to accommodate states that did not have a tradition of

legislative m odification of the common law rules of fixtures.

5. S.O . 1967, c. 73.

6. Personal Property Security A ct, S.M . 1973, c. 5.

7. Personal Property Security A ct, S.S. 1979-80, c. P-6.1.

8. See, Proceedings: Uniform Law Conference of Canada, 1982 at 33 and Appendix X .

39

APPENDIX C

THE OPERATION OF SECTION 36*

A. Background to Section 36

Section 36 of the PPSA operates against a common law background that regards“fixtures” as real property. The first inroad on the common law position occurredwith the introduction of conditional sales legislation which provided that goods,1

other than “building materials,” conditionally sold and affixed to land remainedsubject to the rights of the seller as fully as before being affixed if a notice of these2

rights was filed in the land title office. This significantly modified the common lawrule. The approach of conditional sales legislation has been extended and more fully3

developed by modern personal property security legislation.

The basic structure of section 36 was taken from section 9-313 of the AmericanUniform Commercial Code, 1962 Official Text. This version of section 9-313 was4

adopted, with modifications, by the 1967 Ontario Personal Property Security Act. Ontario's5

adaptation of the section was followed in the Manitoba and Saskatchewan6 7

legislation as well as the Uniform Personal Property Security Act. While section 36 reflects8

some drafting changes, its basic structure and the policies that it implements are thesame as found in all of the other Canadian versions of the PPSA.

B. The Policies of Section 36

Section 36 is designed to permit security interests to be retained in goods thatbecome fixtures and to permit security interests to be taken in goods even thoughthey are fixtures at the time the security interests attach. It contemplates two quitedistinct situations.

The first, and most common, is where goods are purchased under credit arrange-ments which provide that the seller or financer has a security interest in the goods.Section 36 embodies the conclusion that, as a matter of public policy, it is necessaryto recognize that the annexation of the goods does not result in the loss of thesecurity interest in the goods. Modern commercial practices require that the securityinterest in the goods be viewed as continuing in the fixtures as goods with the result

APPENDIX C: THE OPERATION OF SECTION 36

9. In this respect, s. 36 is a much m ore refined version of the system contained in the Sale of Goods on Condition

Act.

10. It is possible at common law to give a contractual right to a third party exercisable against a mortgagee

of land to remove trade fixtures so long as the right is exercised before the m ortgagee acquires a right to

possession of the land through foreclosure proceedings. See, Ellis v. Glover & Hobson Ltd., [1908] 1 K .B. 388 (C .A .

); Credit Foncier v. Lindsay W alker Co., (1919) 48 D .L.R . 143 (Sask. C ..A .). In fact, s. 36 permits only a m uch more

lim ited erosion of the mortgagee's rights. A security interest in the fixtures is enforceable against a person

who had an interest in the land at the date the security interest attached only if that person expressly or

impliedly consented to the security interest. See, Royal Bank of Canada v. Farm Credit Corporation , (1988) 8 P.P.S.A .C .

206 (O nt. S.C .). Under the common law rule, the third party can exercise the right to remove trade fixtures

without the consent of the mortgagee.

11. The lender will wish to search the PPS Registry to determ ine whether or not there are prior security

interests in any of the appliances or equipment that are not “fixtures” under the common law. It will also be

necessary to take account of the 15 day grace period for registration of purchase m oney security interests

provided in s. 22 of the PPSA.

40

that, in the event of default, the security interest can be enforced against the fixturesthrough separation of them from the land and disposal of them as goods.9

The second situation contemplated by section 36 is where the security interestattaches to the fixtures after they have been affixed to the land. While this seems tobe a significant extension of the scheme embodied in conditional sales legislation itcan also be justified. It would be highly artificial to distinguish between recognizinga security interest in existing fixtures and recognizing that a security interest createdbefore the goods becomes fixtures continues after the annexation. In bothsituations, what is being recognized is the right to have the fixtures removed fromthe land and reconverted into goods as a necessary step in the enforcement of thesecurity interest. Moreover, the concept has precedent in the common law.10

There are practical reasons for allowing an owner (or lessee) of land to give anenforceable security interest in fixtures that person has attached to the land. Thefixtures may be assets of very high value and, as such, important to the owner'sability to get business financing. The critical requirement is that mortgagees andothers having an interest in the land to which the fixture is attached be fully andfairly protected. So long as this goal is achieved by section 36, objections based onform and doctrine should not be given too much weight.

C. The Functioning of Section 36

The functioning of section 36 is best illustrated with an example:

A lender wants to take a mortgage on an existing apartment building that hasinstalled in it air conditioning equipment and elevators (the “equipment”). Itis part of the arrangement that the lender will have a security interest in all“fixtures including household appliances in the individual apartments.”

How are the lender's interests to be protected in this transaction? It should be notedat the outset that some of the appliances intended to form part of the lender'ssecurity will not be fixtures according to the common law “tests.” With respect tothese, the transaction is one purely of a security interest in goods and the lender'sposition will be determined with reference to provisions of the PPSA other thansection 36.11

With respect to the equipment and those appliances that are “fixtures” the lendermust look to section 36. In what circumstances can the lender claim priority? Therelevant subsections of section 36 provide:


12. S. 36(3).

41

(3) Except as provided in this section and in section 30, a security interest in goods that attaches before or atthe time the goods become fixtures has priority with respect to the goods over a claim to the goods made bya person with an interest in the land.

(4) A security interest referred to in subsection (3) is subordinate to the interest of(a) a person who acquires for value an interest in the land after the goods become fixtures

including an assignee for value of the interest of a person with an interest in the land at thetime the goods become fixtures, and

(b) any person with a registered mortgage on the land who(i) makes an advance under the mortgage after the goods become fixtures, but only with

respect to the advance, or(ii) obtains an order for sale or foreclosure after the goods become fixtures

without fraud and before the notice of the security interest is filed in accordance with section 49.

(5) A security interest in goods that attaches after the goods become fixtures is subordinate to the interest ofa person who

(a) has an interest in the land at the time the goods become fixtures and who(i) has not consented to the security interest,(ii) has not disclaimed an interest in the goods or fixtures,(iii) has not entered into an agreement under which a person is entitled to remove the

goods, or(iv) is not otherwise precluded from preventing the debtor from removing the goods, or

(b) acquires an interest in the land after the goods become fixtures if the interest is acquiredwithout fraud and before the notice of the security interest in the goods is filed in accord-ance with section 49.

An existing PPSA security interest in fixtures (if one exists) might have beentaken either before or after the fixtures were annexed to the land. Although each ofthese possibilities is addressed by a separate provision, the result in both cases willturn on whether a filing has been made under section 49 by the holder of acompeting PPSA security interest.

Normal lending practice will call for a search of the land title office to determineif the debtor owns the land and if there are any prior interests in the land. Thesearch will also disclose whether any filings have been made under section 49 inrelation to fixtures. If no fixture filings are found, the lender will be able to completethe transaction and claim priority as to existing fixtures. Section 36(4)(a) will ensurethe lender's priority over any security interest that attached to the fixtures before theywere annexed to the land. Section 36(5)(b) ensures priority over security intereststhat attach after annexation.

After the lender registers its mortgage, the debtor may give a security interest inthe fixtures to another person (Secured Party). Even though the Secured Party doeseverything required by the PPSA to perfect the security interest, the lender isprotected from the security interest without the need to take any steps whatever.Under section 36(5), the lender has priority unless it consented to the securityinterest.

It is important to note that the lender is protected in the way that has beendescribed only with respect to goods that were affixed to the land before the lendertook its mortgage. The result may be different if the mortgage is taken first and thegoods are later affixed to the land. If those goods are subject to a security interest,that interest will defeat the lender. Moreover, that security interest need not be12


13. It is som etim es suggested that the security interest should at least be perfected in the Personal Property

Registry in order to have priority over the lender. This suggestion, however, reflects a m isunderstanding of

the function of section 36. “Perfection” under other PPSA provisions such as s. 35 regulates priority vis-a-vis

other security interests in the fixtures as goods. S. 36 deals with priority of a security interest in fixtures as

against an interest in the fixtures arising out of an interest in the land to which they are annexed. The section

does not require in any context that a security interest in the fixture be perfected by registration in the

Personal Property Registry in order to have priority over the holder of an interest in land.

14. If, before the goods are affixed, the land owner becom es aware that the provisions of the construction

contract relating to the fixture constitutes a breach of the security agreem ent under which the security interest

in the fixture arose the land owner's priority will be lost. The protection of section 30(1)-(2) likely extends

to anyone having an interest in the land owner's interest in the land, including a m ortgagee of the land. W hile

a mortgagee is not a “buyer of goods” as defined in section 30(1), it has a derivative interest (i.e. an interest

in the land owner's interest in the land) and, consequently, stands in the shoes of the land owner for priority

purposes.

42

registered in either the Personal Property Registry or a land title office to obtain thatpriority.13

D. Other Limits on Fixture Financing

The PPSA contains a special feature designed to ensure that a land owner'sinterest in goods annexed to the land under contract with the owner is notjeopardized by a security interest in the fixture given by a person, other than the landowner, who annexed the goods to the land. The problem addressed could arisewhere the land owner enters into a construction contract that provides for theinstallation of fixtures that are to be supplied by the contractor. Any security interestin the goods to be affixed under the contract held by a supplier or financer of thecontractor is preserved under section 36(3) of the Act without registration or noticeto the land owner. It does not follow, however, that the land owner takes subject tothe security interest.

Sections 30(1) sets out the following definitions:

“seller” includes a person who supplies goods that become a fixture or accession under a contract with a buyerof goods or under a contract with a person who is party to a contract with the buyer;

“the ordinary course of business of the seller” includes the supply of goods in the ordinary course of businessas part of a contract for services and materials.

These definitions apply to section 30(2):

(2) A buyer or lessee of goods sold or leased in the ordinary course of business of the seller or lessor takes freeof any perfected or unperfected security interest in the goods given by the seller or lessor ..., whether or notthe buyer or lessee knows of it, unless the buyer or lessee also knows that the sale or lease constitutes a breachof the security agreement under which the security interest was created.

The effect of these provisions is that the land owner is treated as having bought thegoods affixed under the construction contract in the ordinary course of business withthe result that the fixtures are acquired free from any security interest in them givenby the contractor or by a supplier to the contractor.14

1. The correctness of the label “fixture” when applied to an item that can be attached or removed has

provoked some discussion. Anger and Honsberger, Law of R eal Property (2nd. ed., 1985) 1009 concludes that:

The true rule undoubtedly is that a chattel which has become affixed to the freehold loses its

character of a chattel while it is affixed but, in certain circum stances, may be removed and restored

to its original character of a chattel.

A fixture that is removed for some temporary purpose such as repair retains its character as “land,” even while

removed.

2. The tenant m ay enter an agreement to the contrary. See Anger and Honsberger, ibid at 1045.

3. As between a landlord and a tenant, trade fixtures are subject to rem oval: Thom v. Browne, (1960) 26 D.L.R .

(2d) 115 (B.C.S.C .). As between mortgagor and m ortgagee, the general common law rule relating to fixtures

is thought to apply: M eux v. Jacobs, (1875) L.R . 7 H .L. 481. Anger and Honsberger, however, suggest that in

the absence of an express stipulation to the contrary, a mortgagor in possession has the right to permit trade

fixtures to be put up and removed from the mortgaged premises, but this right of removal ceases when

possession is taken by the mortgagee; the full effect and application of this principle is a matter of some

doubt: supra n. 1 at 1036. See also E llis v. Glover & Hobson Ltd., [1908] 1 K .B. (C .A .).

4. Annexation itself can be a fluid concept. Things that are essential to the use of land, although not

annexed to it, may be held to be “constructively annexed” and characterized as fixtures.

5. (1902) 4 O .L.R. 335, 338 (D iv. Ct.) per M eredith C .J.

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APPENDIX D

WHAT IS A FIXTURE?

A. At Common Law

Goods may become attached or affixed to land so as to become part of the land.When this occurs the article of goods becomes a “fixture.” The idea of goodsbecoming part of the land goes back centuries in the common law and is an instanceof the importance the common law placed on real property. The common law rulewas subject to the qualification that some fixtures could be removed, particularlythose that were not essential for the enjoyment of the land.1

With the idea that a fixture could be removed came the concept of “tenant'sfixtures.” These are articles that are attached to leased premises after the term of thetenancy has begun. They may be detached and removed by the tenant Among2

tenant's fixtures that may be removable are trade fixtures. These include all sorts ofitems used by a tenant in a business from shelving to boilers to mills.3

Whether an article has become a fixture depends upon the degree and mode ofannexation. Stack v. T. Eaton Co. set out five general rules to be applied in determining4

whether something had become a fixture: 5

(1) That articles not otherwise attached to the land than by their own weight are not to be considered as partof the land, unless the circumstances are such as to shew that they were intended to be part of the land.

(2) That articles affixed to the land even slightly are to be considered part of the land unless the circumstancesare such as to shew that they were intended to continue chattels.

(3) That the circumstances necessary to be shewn to alter the prima facie character of the article arecircumstances which shew the degree of annexation and object of such annexation, which are patent to all tosee.

(4) That the intention of the person affixing the article to the soil is material only in so far as it can be presumedfrom the degree and object of the annexation.

(5) That, even in the case of tenant's fixtures put in for the purposes of trade, they form part of the freehold,with the right, however, to the tenant, as between him and his landlord, to bring them back to the state ofchattels again by severing them from the soil, and that they pass by a conveyance with the land as part of it,subject to this right of the tenant.

APPENDIX D: WHAT IS A FIXTURE?

6. E.g., La Salle Recreations Ltd. v. Canadian Candex Investments Ltd., (1969) 68 W .W .R. 339 (B.C.C.A .).

7. In fact, the “rules” are not necessarily internally consistent.

8. Hobson v. Gorringe, [1897] 1 Ch. 182, 191 (C .A.) Anger and Honsberger, supra n. 1 at 1017-1019, conclude

from the cases an even stronger view that the intention of the parties is irrelevant.

9. See AM IC M ortgage Investment Corp. v. Investors Group Trust Co., (1985) 40 A lta. L.R . 71 (C.A .).

10. Davy v. Lewis, (1859) 18 U.C.Q.B. 21, 29; Re Maple Leaf Coal Co., [1951] 4 D .L.R. 210 (A lta. S.C., App. D iv.).

If a chattel by its very nature is incapable of being affixed, it cannot be m ade into a fixture by the parties:

Agricultural D evelopment Board v. Ricard , (1927) 32 O .W .N. 140 (H .C.).

11. E.g. furnaces, plumbing items, ceiling lights.

12. E.g. carpets, chairs, shelves.

13. Lyon & Co. v. London City and Midland Bank , [1903] 2 K .B. 135, cf. Berlin Interior Hardware Co. v. Colonial Investment

and Loan Co., (1918) 38 D .L.R. 643 (Sask. S.C .).

14. British Econom ical Lamp Co. v. Empire, M ile End, Ltd., (1913) 29 T.L.R. 386.

15. Sewell v. Angerstein, (1868) 18 L.T. 300.

44

The nature of the article and the use of the premises are factors which courtshave also taken into account. A test frequently used is to ask whether the article isbeing attached for the better enjoyment of the building or the land as opposed to thebetter use of the article as such.6

The various “rules” still leave much scope to the intention and purpose of theparties concerning the annexation. The intention of the parties who affix the goods,7

however, is determined with reference to the degree and object of the annexationand has little to do with their subjective intention. Two parties may agree that an8

item is a fixture and while this designation may be binding on them, it will notnecessarily bind a third party.9

Although generally the intention of the parties plays little part in determiningwhether an article has become a fixture, the parties can, with some restrictions,determine their respective rights as to the ownership and removability of thefixtures.10

Various factors are taken into account to determine whether at common lawsomething has become a fixture. These include the nature of the object, the degreeof annexation, what constitutes annexation, the purpose of the premises, whatconstitutes better enjoyment of the premises as opposed to the better enjoyment ofthe article. Given the number and complexity of these factors, it should surprise noone that the law in this area is not a model of consistency and clarity. While it canbe said with relative certainty of many things that they are fixtures there will always11

be a large grey area.12

It is relatively simple to set out tests for identifying fixtures, but the applicationof those tests to particular facts can be difficult. Numerous examples are availableto illustrate the eccentric operation of this body of law.

For example, chairs in a theatre which are screwed to the floor have been held tobe attached for their better use and enjoyment as chairs and are therefore were notfixtures. Why the attachment of the chairs could not be seen as accomplishing a13

better use of the building as a theatre was not addressed by the court. Electricfilament lamps have been held to be temporarily fixed only, while “gaseliers” have14

been held to be fixtures because they were attached to gas pipes which would havebeen useless without them.15

Machinery presents particular problems in classifying property as a fixture ornon-fixture. Cases can be found which consider essentially similar circumstances and

APPENDIX D: WHAT IS A FIXTURE?

16. In Liscombe Falls Gold M ining Co. v. Bishop, (1905) 35 S.C .R. 539 a stamp mill was erected for the purpose of

testing ores. Various parts of the m ill either rested by their own weight on the soil or were stead ied by bolts,

but because the whole installation could be rem oved without injury to the freehold, it was held to be a chattel.

However, a sim ilar means of attachment in the case of a gas engine did not prevent it from becom ing a fixture

in Hobson v. Gorringe, supra n. 8. even though the owner of the engine and its hirer quite clearly intended that it

not become a fixture. In Seeley v. Caldwell, (1908) 18 O .L.R. 472 (H .C.) a num ber of articles of machinery were

attached to a slight degree to a building, but all were detachable at slight cost and effort and without damage

to the building. Notwithstanding that fact and the clear agreement between the lessor and the lessee that the

m achines not become part of the land, they were held to be fixtures. In Parsons v. H ind, (1866) 14 W .R . 860.

it was held that a hydraulic press attached to the floor of a factory by means of brick and m ortar remained

a chattel because it was a mere convenience and not essential to the carrying on of the works at the factory.

17. (1985) 58 B.C.L.R. 79 (S.C .).

18. S. 1(1).

19. Ibid .

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arrive at quite different results on this issue. A recent British Columbia case16

provides an extreme example of how unpredictable this exercise has become. In L& R Canadian Enterprises Ltd. v. Nuform Industries Ltd. it was held that a self-propelled17

forklift truck was “constructively annexed” to the land on which it operated. Theforklift was held to be a fixture and subject to a mortgage of the land beingforeclosed (to the exclusion of the mortgagor and certain chattel mortgagees).

B. Under the PPSA

While the PPSA contains a definition of “fixture” it is of very limited assistance:18

“fixture” does not include building materials;

This tells us that some things are not fixtures but does not tell us the things that arefixtures. Accordingly, whether in any particular situation goods attached to realproperty are fixtures, is determined with reference to the common law testsdescribed above.

Certain types of goods, “building materials”, that are fixtures at common law areexcluded from the operation of section 36. This expression is defined:19

“building materials” means materials that are incorporated into a building and includes goods attached to abuilding so that their removal

(a) would necessarily involve the dislocation or destruction of some other part of the building andcause substantial damage to the building apart from the loss of value of the building resultingfrom the removal, or

(b) would result in the weakening of the structure of the building or the exposure of the building toweather damage or deterioration,

but does not include(c) heating, air conditioning or conveyancing devices, or(d) machinery installed in a building or on land for use in carrying on an activity inside the building

or on the land;

The definition of “building materials” in the Act does not affect what is and whatis not a fixture at common law. While an item, such as machinery installed in abuilding, is not “building materials,” it does not follow that it is a fixture, a securityin which is subject to the regime of section 36. If at common law it is not a fixture,section 36 is irrelevant. On the other hand, an item that falls within the definitionof “building materials” may be a “fixture” at common law, but not under the PPSA.The common law governs the characterization of any interest taken in the item.

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47

APPENDIX E

TWO OUTSTANDING ISSUES

A. Priority to Fixtures Under a General Security Agreement

When a fixture becomes attached to land that is subject to a mortgage, in theabsence of any competing interest in the fixture, the lender's security is enlarged toembrace the new value represented by the fixture. One of our correspondentsreferred to this as “sweetening” the interest of the mortgage lender. If, however, theitem in question is subject to a security interest that attached before or at the timeit became a fixture, the secured party will have priority over the mortgage lender. Inmany cases this is a defensible result. The mortgage lender's financing was notgeared to the acquisition of new fixtures. The secured party, on the other hand, mayhave expressly lent money on the security of the fixture or, indeed, financed itsacquisition. In this kind of competition, the priority structure of section 36 achievesan acceptable result.

But not every secured party who obtains an interest in fixtures will do so by virtueof a financing that relies on the acquisition of that fixture. The fixture may well havebeen swept into a pool of collateral claimed by a financier under a general securityagreement. By this we mean an agreement which claims a security interest in all ofthe debtor's present and after acquired personal property. Here the questionwhether section 36 achieves the correct result is less clear-cut. Example:

D is a small wholesaler of widgets. D is the registered owner of the premisesout of which the business is operated. The building was acquired withfinancing from ML who took a mortgage on the premises. These eventsoccurred in 1991. In 1992 D sought credit to expand the business inventory.Funds for this purpose were advanced by SP who took a security interest inall of D's present and after acquired personal property. In 1993 an agingfreight elevator in the premises ceases to function. D purchases a newelevator system and causes it to be installed in the premises. In 1994 Ddefaults under both the mortgage of the premises and the general securityagreement.

In this example, both ML and SP assert an interest in the new elevator. Neither tooktheir security on the basis that D would be acquiring a new elevator and whicheverparty succeeds in this competition their security will be “sweetened” somewhat.

A person who is uninitiated in the mysteries of section 36 might well think thereis no principled basis for choosing one party over the other. If anything, such anobserver might see the equities slightly in favour of the real property lender, giventhe close connection between the elevator and the building itself. The result flowingfrom section 36, however, dictates an opposite result. The elevator, when Dacquired it, fell into the description of collateral under SP's security agreement andthat security interest attached no later than the time the elevator became a fixture.Section 36 mandates a priority for SP.

We believe that this kind of result calls for further examination. Should the PPSAstipulate that language of a kind usually used in a general security agreement is notsufficient to create a security interest in a fixture (or at least certain classes of fixture)essentially, this approach would require an “item or kind” type of description forfixtures. This issue is one we wish to explore further and preliminary comments onit would be welcome.

APPENDIX E: TW O OUTSTANDING ISSUES

1. See Appendix A .

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B. Narrowing the Concept of “fixture”

The complexity of the common law tests which are applied to determine whetheror not a particular item of property is a fixture are described in Appendix D. Giventhe complexity of this exercise it is not surprising that no attempt has been made inany North American version of the PPSA to define “fixture.” Any attempt to restateaccurately and comprehensively all that is embraced by that concept has been seenas a hopeless task.

A more limited approach is possible. Without attempting to describe all that isembraced within the concept of fixture it is possible to identify certain items, kindsor types of property and state that they are not fixtures. An example of thisapproach is to be found in the British Columbia PPSA. The definition section tellsus that:

“fixture” does not include building materials.

The expression “building materials” is, itself, the subject of an elaborate definition.1

The effect of this is to leave building materials (which in some circumstances the lawwould classify as fixtures) to be governed purely by real property law so far assecurity in them is concerned. It might be equally possible to identify certain kindsor classes of property that, although the common law might regard them as fixtures,ought to be treated as personal property whether or not they become attached to theland.

One correspondent who wrote to us suggested that the law should identify acategory of property that might be referred to as “industrial equipment.” The kindsof items that might be embraced by “industrial equipment” are pulp and papermaking machines, printing presses and the like. The suggestion is that any propertythat comes within a definition of industrial equipment should be treated as personalproperty, either for the purposes of financing or, perhaps, for all purposes, whetheror not this property was attached in some fashion to the land.

Many items of industrial equipment stand on the hazy boarder between realproperty and personal property and the failure of the law to speak clearly as to theirstatus produces unnecessary litigation. Moreover, where there is even the slightestpossibility that an item of property might be held by a court to be a fixture, the well-advised secured party will file a notice in the Land Title Office as provided in section49. This adds expense to the financing transaction, clutters up the land title systemwith numbers of filings that are probably unnecessary and heightens the tensionbetween the users of the respective registration systems.

APPENDIX E: TW O OUTSTANDING ISSUES

2. An early attem pt is to be found in the following definitions contained in the (now repealed) Chattel M ortgage

Act, R .S.B.C. 1979, c. 48, s. 1:

“trade machinery” means machinery used at a workshop, except

(a) fixed motive power units such as steam engines, steam boilers and things fixed to

them;

(b) fixed power machinery such as shafts, wheels, drums and things fixed to them, used

to transmit motive power to other machinery, fixed or loose; and

(c) pipes for steam, gas and water in the workshop;

“workshop” means premises where manual labour is performed as a trade or for gain, in or

incidental to the m aking, alteration, repair, finishing or adaptation for sale of an article or part of it.

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Pursuing this suggestion would not be free of difficulty. Simply developing adefinition of “industrial equipment” presents a formidable challenge and transitional2

issues would require careful consideration.

Comments on the feasibility of pursuing this suggestion would be particularlyhelpful to the Commission.

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